The European Union is pledging 650 million euros to Somalia for 2013-16, said European Commission President Jose Manuel Barroso.

"Somalia has made important progress this year," Barroso said after talks with Somali President Hassan Sheikh Mohamud on Monday, adding however that "problems and challenges remain."

"This funding will contribute to all peace- and state-building goals," said EU Development Commissioner Andris Piebalgs, adding that the bloc would additionally continue to fund the African Union peacekeeping mission in Somalia.

International donors began work on a "New Deal" for Somalia to drive its economic and political recovery after two decades of bloody civil war.

Some 50 high-level delegations from Africa, Europe and the Gulf were attending the one-day meeting in Brussels, along with aid groups and global finance institutions.

The New Deal Compact, to be approved on Monday, sets out the government priorities and outlines future international support.

Somali President Hassan Sheikh Mohamud said he was "very grateful" for all the effort made on behalf of his country, highlighting four priorities among the many tasks ahead -- security, legal reform, public finances and economic recovery.

But Somalia's al-Shabab rebels, which control wide swathes of southern Somalia, on Monday dismissed the conference as a waste of time.

"It's a bit like Belgian Waffles: sweet on the outside but really has not much substance to it. They are just hollow promises of Kufr," the group said on Twitter.

High on the agenda are plans to get one million children into school in a country that has one of the world's lowest enrolment rates -- with only four of every ten children in class.

Shabaab attacks

In recent months, however, several deadly al-Shabab attacks have dented confidence.

In June, a suicide commando assault on a fortified UN compound in the centre of Mogadishu killed 11.

At least 18 people were killed in Mogadishu on September 7 when two blasts rocked a popular restaurant, an attack quickly claimed by the al-Shabab.

With insecurity growing, in August medical aid agency Doctors Without Borders (MSF) closed all its operations in Somalia, after 22 years of working in the Horn of Africa troublespot.

As well as a military training mission in Somalia, the EU runs an anti-piracy operation off the Somali coast, where attacks on shipping have fallen steadily in the past year.

Mohamud's government came to power last September after more than a decade of transitional rule.